Nov. 13 (Bloomberg) -- South Korea will allow investors to
short sell financial stocks from tomorrow, signaling that
regulators believe banks and insurers are strong enough to
withstand the lifting of a ban imposed during the 2008 crisis.

The restriction is being removed because equities have
stabilized since July and the government wants to bolster
capital markets, the Financial Services Commission said today in
an e-mailed statement. Short sales occur when an investor sells
borrowed securities in anticipation of a price decline.

Removing the ban may spur trading volumes that have slumped
even as equities recover, eroding earnings at brokerages
including Samsung Securities Co. and Daewoo Securities Co. South
Korea, which forbade short sales for all stocks in October 2008,
lifted the ban for most companies in June 2009, while keeping
restrictions on financial stocks.

“This shows the FSC believes in the resilience of Korea’s
financial stocks and industry,” Michael Na, a Seoul-based
analyst at Nomura Holdings Inc., said by phone. “Unless there’s
a real panic situation like the 2008 crisis, short selling will
help to reduce market volatility and boost trading volume.”

The regulator will revise rules by June 2014 to enhance
disclosure on short-selling positions and ensure violators are
penalized. The FSC will closely monitor transactions for
financial shares, which account for 12 percent of the value of
South Korea’s equity market, it said.

Naked Selling

So-called naked short selling, which refers to selling
equities without holding them, will continue to be prohibited
for all stocks, according to the FSC.

“We expect this will help vitalize the capital market and
boost market transparency,” it said. “We want to minimize any
ill effects of short selling and maximize its good function by
enhancing indirect regulations and lifting the ban.”

The benchmark Kospi index has rallied about 10 percent from
an 11-month low reached on June 25. The gauge climbed for a
fourth straight month in October, fueled by purchases from
foreign investors. It closed 1.6 percent lower today before the
statement was released.

Trading volume in South Korea has declined even as shares
rose. For financial stocks, the daily average volume was 352.5
billion won ($329 million) in the first half of this year, down
from 935.2 billion won in 2008, the FSC said in the statement.

Earnings at domestic and foreign brokerages operating in
South Korea shrank to 565.2 billion won in the six months ended
June, about a third of the level reported two years earlier,
Financial Supervisory Service data show. That was the lowest
since the industry posted a 294.9 billion won profit in the same
period of 2005. Earnings in the three months ended September
were 132.4 billion won, the FSS said this week.

“Removal of the ban will help increase trading volume of
financial stocks, which would support the securities industry
and asset managers,” Sohn Joon Beom, a Seoul-based analyst at
LIG Investment & Securities Co., said by phone. “The move is
evidence that South Korea is confident about its stock market.”